The Risk-Free Rate Is 2

question 32

Multiple Choice

The risk-free rate is 2%. The expected rate of return on the market is 12%. Beta and the expected rate of return for four shares are as follows.: ABC .8, 10%; DEF 1, 12%; GHI 1.2, 13%, and JKL 2, 22%. Which of these shares should not be purchased?

• A) GHI.
• B) JKL.
• C) DEF.
• D) ABC.

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Definitions:

Allocation Of Resources

The process by which resources are distributed for the production of goods and services, usually determined by market forces in a free market, or by government decisions in a planned economy.

Resource Use

The consumption or exploitation of natural resources by humans for manufacturing, energy production, and other economic activities.

Real Rate

The interest rate that has been adjusted to remove the effects of inflation, reflecting the true cost of borrowing.

Nominal Rate

The interest rate before adjustments for inflation, often referred to in the context of loans and savings.